First Time Buyers' Guide to Mortgages
Taking out a mortgage for the first time can be both an exciting and a daunting time for prospective home owners. At first glance it can seem like a huge undertaking that is riddled with pitfalls and traps. Here in our first time buyers' guide to mortgages we will talk you through all of the key questions that you need to answer in order to make sure that you don't get caught out.
In recent times house prices have been going up significantly faster than wages. This means that it has become increasingly difficult for people to get a foot on the property ladder for the first time. Many people now choose to rent instead of going down the route of home ownership. However it is still possible to take out a mortgage that is both manageable and affordable, as long as you take care to operate within your limits.
Many people make the mistake of focusing on how large a deposit they can afford to put down on a mortgage but this should not be your primary concern. Instead you should try and consider how much you think you will be able to afford on your repayments each month. By thinking about this you can make sure that you don't end up struggling with the mortgage repayments.
What can you afford?
One thing that you should try and avoid doing is overestimating how much you will be able to pay back each month. It may be tempting to convince yourself that you can afford the dream house that you have found but if you end up spending each month worrying about how you will make the next repayment, this dream could turn into a nightmare.
You should try and establish exactly what your current expenditures are. These expenditures should include everything from your credit cards and other loans to your day to day living costs, such as food. Once you have worked these out you should then consider how much you will need to spend on your utilities in your new home. Think about your gas and electricity costs, your council tax, your phone bill, home insurance and anything else that you will be required to pay for.
It is also important to consider how your circumstances might change in the future. Think about what would happen if you were to be made redundant or fall ill and how that would affect your ability to make the repayments. You should also bear in mind the fact that interest rates could rise which would place a higher financial strain upon you. A good way to work out all these things is to fill in a budget planner.
What amount of money do you require?
Now that you have worked out the amount that you can afford to borrow, you feel more ready to approach a first time buyer lender. However, you should consider a few more things before you do run out and take a big loan.
You now need to consider what size deposit you would like to put down and on how big a loan. This, in combination with your income, will be the primary factor in how much you can afford to borrow.
The smallest size deposit you will be able to find on a mortgage is 5%, this size of a deposit will normally be available through some of the government run Help to Buy schemes. However, the bigger the sum that you are willing to put down as a deposit, the less you will be required to take out as a loan. This means that both your interest rates and your monthly repayments will be lower.
What it all comes down to is the loan to value ratio. Your loan to value ratio or LTV represents the size of your deposit in relation to the amount of money you would like to borrow. If you want to use a £30,000 deposit to buy a £600,000 home, your LTV would stand at 95%. This means that you would be borrowing a total of £570,000 at an interest rate that would be fairly high. This would represent a considerably expensive commitment over the term of your mortgage. On the other hand if you were to use your £30,000 to buy a home worth £200,000, your LTV would stand at 85%. This means that you would be borrowing a lot less and benefiting from much lower interest rates and paying out a lot less each month.
On top of all the costs that one would normally associate with taking out a mortgage, there are also extra fees that you should take into account.
Here are some of the fees that you can expect to be faced with (exact fees will vary):
- Mortgage booking fee - £250
- Arrangement fee - £1,000
- Valuation fee - £500
- Account fee - £200
- Legal costs - £500
- Search fee - £250
- Survey fees - £250-£600
- Moving costs - £500
There are also costs such as stamp duty that will be added to any purchase that is worth over £125,000.
Types of Mortgages
Once you have decided how large a mortgage you are financially able to manage, it is time to start thinking about what type of mortgage you would like to take out.
Fixed rate mortgages allow you to set your interest rates at a specific level for a certain amount of time. It is possible to set your interest rates for anywhere between two and ten years. Once this fixed rate period is over, the interest rate that you will pay can vary freely once again so it important to consider this when signing up to this type of plan.
Tracker mortgages are another type of plan that you could choose to take out. These mortgages fix your interest rates to a set amount either above or below the base interest rate set by the Bank of England. If the rate set by the Bank of England goes up, the interest rates that you pay will follow suit.
The last type of mortgage that you can take out is a standard variable rate plan. These mortgages allow the interest rates to change freely and your bank determines how much they fluctuate. These can often be the cheapest but are also the most risky because your lender can choose to raise them at any point.